Renewed tensions between US and China prompted a rather mixed session for the Asian credit space last week, as the Trump administration continued its scrutiny on business dealings with Chinese corporates and state-owned enterprises (“SOE”).
According to latest developments, the US is now looking to add Chinese tech players – including Alibaba and Tencent among others – into its ban list. In addition, further uncertainty was imbued after the NYSE went back on its decision to delist three Chinese telecommunication players – namely China Mobile, China Unicom and China Telecom – only to revert back to its original decision at the end of the week.
Following which, sentiment wore thin for the Chinese tech and SOE space, which makes up a sizable component within the Asian credit index. Chinese tech names bore the brunt of the selloff as yields widened by as much as 25 to 30 bps. Despite the pullback, we are convinced on the sound fundamental positioning of names such as Alibaba and Tencent, and we remain comfortable in our exposure to these names given that both businesses are very much domestic-driven.
While the recent directive could see US banks refraining from facilitating market making services for these names, we believe that there is ample room for Asian banks to step up to take on these additional supplies. Also considering that the bulk of investors for such Chinese corporates and SOEs are based in Asia itself, we believe that liquidity should remain supportive and we expect the chase for yields in the region to continue in the near- to medium-term.
In terms of portfolio action for our regional funds, we took the opportunity to participate in several new deals within the Chinese property space such as Country Garden and Yuzhou Group for added yield carry. In addition, we also participated in a 5-year issuance that was priced at 2.15% by Hai Di Lao.
Back home, the Malaysian bond market started the session strong but soon saw momentum tapered off towards the end of the week amid the rise in UST yields, as well as expectations of a hard lockdown across the country. The 10-year MGS benchmark yield ended the week 2 bps higher to close at 2.67%.
On the primary front, markets were greeted with a 7-year MGS reopening last week of RM3.5 billion in size. The issuance posted a healthy bid-to-cover ratio of 2.0x and closed with an average yield of 2.45%. As for the corporate segment, Khazanah is expected to tap into the market in the coming weeks to raise an estimate size of RM1.5-RM2.0 billion. In addition, Pulau Indah Power Plant is also looking to issue a AA3-rated bond of around RM3 billion in size in the coming weeks.
On a separate note, foreign flows data continue to be supportive for the month of December 2020, as the local bond market added another RM3.6 billion worth of inflow to push the cumulative total for the year to RM18.3 billion (vs. RM19.9 billion in 2019). As of end-December 2020, the foreign holdings for MGS stood at 40.6%.
Treading ahead, market attention will likely be focused on the upcoming Monetary Policy Committee meeting on 20 January 2021. The consensus is that Bank Negara Malaysia will likely keep its Overnight Policy Rates unchanged at this juncture. Though having said that, there is certainly room for the central bank to deliver another interest rate cut especially given the reintroduction of MCO. We will continue to keep a close watch on further developments on this front.